Module 4 revision cards - part 2

Question 1

What is management accounting

Answer 1

The sourcing and analysis of financial and non-financial information for a business’s management to help them run the business effectively and efficiently

Question 2

What is a management accounting system

Answer 2

A system or process which collects internal data from business operations such as sales, inventory, raw materials and then analyses the info to produce reports for management

Question 3

What to consider when choosing a man account system

Answer 3

One that integrates with the business’s financial accounting system to increase the timeliness of management reports and eliminate redundant work or duplication

Question 4

Difference between financial and management accounting

Answer 4

Financial
1 Primarily used by external stakeholders
2 Info is based on historic data (look backwards)
3 Reports using accounting standards

Management
1 Used by internal stakeholders
2 Info to analyse trends and statistics to inform future strategy (i.e. ‘looking forwards’)
3 More complete reporting with no rules and legislation around how to prepare it

Question 5

How should man accounts be reported/formatted

Answer 5

Accurate
Understandable
Comparable
Timely/up to date

Question 6

What is the main type of accounting system and what is its purpose

Answer 6

Cost accounting system

Looks at all of a businesses expenses to determine the fixed and variable costs associated with making the product

Question 7

What are different types of cost accounting method

Answer 7

Standard costing
Normal costing
Actual costing
Activity based costing (ABC)
Life cycle costing
Target costing

Question 8

Explain how each type of cost accounting method is calculated

Answer 8

Standard - using PREDETERMINED/STANDARDISED expected costs (“standards”) for both direct AND indirect costs to estimate the total cost of production of an item or output

Normal - using ACTUAL DRIECT direct costs and PREDETERMINED indirect costs

Actual - using ACTUAL direct AND indirect costs

Activity based - overheads/indirect costs apportioned/ allocated more of the total overhead depending on volume of product

Life cycle - cost accumulated over the entire products life. From R&D all the way through to discontinued

Target - goals are preset. The business plans target price point, product cost and margins in advance but cancels the project if these cant be attained or maintained

Question 9

In what 2 ways does man accounting evaluate and analyse performance

Answer 9

Key performance indicators (KPIs)
Balanced score cards

Question 10

What is a KPI

Answer 10

Values that can be used to evaluate how successful something has been in meeting performance or objectives

Often measured against 1 of 4 types of benchmark

Question 11

What are the 4 types of benchmark

Answer 11

Internal
Functional
Generic
Competitive

Question 12

What does each of the 4 benchmarks compare

Answer 12

GENERAL INTERNAL COMPETITION ACHIEVES BEST IN CLASS

Internal - against other units or areas within the business

Functional - compare internal functions against the best in class external practitioners

Generic - compares a process to a conceptually similar process in another/unrelated business or industry

Competitive - compares against a direct competitor

Question 13

What is a balanced score card and what areas of measurement does it cover

Answer 13

FINANCIAL CUSTOMERS LEARN AND GROW THROUGH INTERNAL BUSINESS

Analyses 4 areas to help monitor and develop KPIs - FLIC

Financial - performance and how it looks to its shareholders

Learning & growth - where it can continue to grow and create value

Internal business - evaluating processes, bottlenecks, waste, delays, as well as evaluating what the business excels at

Customer - how it is perceived by its clients

Question 14

Ways in which a business can plan and forecast

Answer 14

Cost allocation
Financial modelling
Weighted average cost of capital
Scenario planning
Business valuation of projects (discounted cash flow, net present value)

Question 15

What is cost allocation

Answer 15

Where a business identifies and assigns INDIRECT costs to a cost object (something the business wants to separately measure costs for)

Question 16

What is cost tracing

Answer 16

Where a business identifies and assigns DIRECT costs are allocated to cost objects

Question 17

What is financial modelling

Answer 17

Examine how different economic situations or events would affect the business

Putting different variables into a mathematical equation/formulae to see the impact it has on the business

Question 18

What is weighted average cost of capital

Answer 18

The minimum return to satisfy its creditors, owners and other providers of capital (expressed as a %)

Question 19

What are the 2 main sources of business funds

Answer 19

Equity financing
Debt financing

Question 20

What is equity financing

Answer 20

The capital raised by selling shares

Question 21

What is debt financing

Answer 21

The capital raised from bank loans or issuing bonds

Question 22

What is the cost of equity

Answer 22

The rate of return the company pays to its equity investors (dividends)

Question 23

What is the cost of debt

Answer 23

The interest rate on loans or the coupon rate on the company’s bonds

Question 24

What are shares and bonds collectively known as

Answer 24

Securities

Question 25

What is scenario planning

Answer 25

Management considers a range of possibilities for what may happen in the future so they can be prepared should one of those possibilities occur.

Question 26

What is business valuation

Answer 26

Determines how attractive an investment is by looking at present values, found by working backwards from an investment project’s future amount to see how much that would equate to today Assessed using discounted cashflows and net present values.

Question 27

What does NPV stand for

Answer 27

Net present value

Question 28

What is variance analysis

Answer 28

Compares the differences/variances between what was budgeted for and what the actual value turned out to be

Question 29

List some types of variance that might be analysed

Answer 29

Sales volume variance Sales price variance Direct material price variance Direct material usage variance Fixed/variable overhead variances

Question 30

What is forecasting

Answer 30

Allows a business to plan and make decisions to ensure future profitability and cashflow

Question 31

What are the types of forecasting/planning management use

Answer 31

Cash flow forecasting - predicting the amount of £ in and out of the business Demand forecasting - estimates customer demand through historical data, trends & market research Break even analysis

Question 32

What is break even analysis

Answer 32

The point at which a businesses revenues are equal to its total costs A margin of safety is then calculated to assess riskiness and provide planning

Question 33

What are the considerations of management decisions

Answer 33

AN INVESTMENT IN FINANCING PAYS DIVIDENDS FOR WORKING CAPITAL Investment decision - investments the business should make Financing decision - any long-term financing the business needs to raise Dividend decision - how profits should be distributed to shareholders Working capital management - short-term financing

Question 34

Main management objectives

Answer 34

Maximising shareholder wealth Reinvesting in the company Non financial objectives

Question 35

What is cost–volume–profit (CVP) analysis

Answer 35

Examines how total revenues, total costs and operating profit changes as the following variables change 1 level of output 2 selling price 3 variable costs 4 fixed costs

Question 36

What is contribution

Answer 36

What is left over when subtracting all variable/direct costs from revenue (not necessarily calculated per unit)

Question 37

What is contribution margin

Answer 37

What’s left over when subtracting the variable cost of a unit from a unit’s price

Question 38

What is the purpose of the contribution and the contribution margin calcs

Answer 38

Can be used to help make decisions around pricing, budgets and capital expenditure

Question 39

Assumptions of CVP (cost-value-profit)

Answer 39

All costs can be accurately identified as either fixed or variable The selling price per unit is constant All units produced are sold Changes in activity are the only factors that affect costs

Question 40

Advantages of CVP (cost-value-profit)

Answer 40

Reasonably simple and provides a detailed snapshot of activity within the business Can be used to make decisions on pricing, profit forecasts, cost-reduction decisions and even capital spending

Question 41

Limitations of CVP (cost-value-profit)

Answer 41

Can only provide approximate answers It must be carried out for each specific product, service or business segment, especially where pricing or costs involved are different

Question 42

What is integrated reporting (IR)

Answer 42

A periodic report from the organisation that should consist of: 1. financial information 2. governance and remuneration 3. sustainability information 4. management commentary

Question 43

What detail should be contained in an Integrated Report

Answer 43

Value creation - a better goal for companies and their long-term survivability and reputation, than simply meeting financial metrics of performance Corporate governance - the practice under which a company is directed and controlled Sustainability - the ability of a business to continue indefinitely while focusing on meeting the needs of the present without compromising the ability of future generations to meet their needs Broken down into three different types: Profit - economic Planet - environmental People - social

Question 44

Benefits of Integrated Reporting

Answer 44

Draws on more than financial info Aims to encourage business leaders to think in a way that recognises the business’s interconnectivity, and how its non-financial impacts are linked to its financial impacts. Integrated thinking leads to integrated decision-making and actions that consider the creation, preservation or erosion of value over the short, medium and long term

Question 45

Aims of Integrated Reporting

Answer 45

Aims to illustrate and improve the quality of information available on non financial impacts to its businesses stakeholders Promote a more cohesive and efficient approach to corporate reporting, communicating the full range of factors that materially affect an organisation to create value Enhance accountability and stewardship Support integrated thinking, decision making and actions that focus on the creation of value over the short, medium and long term

Question 46

What is the impact of only considering financials in management decisions

Answer 46

Doesn't see the full/whole picture or take into account the environment or society (Corporate social responsibility (CSR) )

Question 47

What is cost-benefit analysis

Answer 47

Cost comparisons for analysing

Question 48

Disadvantages of breakeven analysis

Answer 48

Assumes costs move in a linear way Not all costs can be classed as fixed or variable Can only be used for a single product at a time Ignores any transfer to/from held stock

Question 49

What is an absorption cost

Answer 49

The cost of all the resources used to produce an item of output or activity. Both fixed and variable costs are taken into account

Question 50

What is an operating statement

Answer 50

A statement reconciling 2 figures via variances. A type of management accounting financial statement